SAP German Tech Giant Flourishes Amidst Dollar and Supply Chain Troubles

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The recent strength of the U.S. dollar and struggles of logistics providers have many market pundits anticipating doom and gloom in the industrial space—but at SAP, it’s business as usual, and that’s good news for investors, CEO Bill McDermott said today during an earnings call to discuss the company’s third quarter results. The cloud software company reported revenue of $4.6 billion, up 10 percent from last year, and earnings per share of 47 cents, ahead of analysts’ expectations by 7 cents per share…

For many tech businesses, the growing dollar, global inflation, and supply chain problems caused by Covid-19 lockdowns in China have been severe hindrances.

However, according to Christian Klein, CEO of SAP, the European software behemoth is an exception.

“Since our largest rivals are Americans, the high dollar works in our favour. We have a significant currency advantage,” Klein told CNBC, pointing out that SAP declares earnings in euros.

The dollar has gained ground in recent weeks after the euro reached parity with the dollar in July for the first time in 20 years. In its first two fiscal quarters, SAP derived 34% of total sales and 52% of cloud revenues from the United States.

Salesforce, Microsoft, and IBM, three other large IT giants, have stated that the high dollar will adversely affect their short-term profitability.

In addition, Klein claims that as consumers seek to reduce prices, growing inflation has sped up the transition from on-premises software to cloud computing services. According to the August report on the personal consumption expenditures (PCE) price index, inflation in the United States has increased by 6.3% over the previous 12 months.

The slower-than-expected reopening of China following the Covid lockdowns has caused supply chain problems, he continued, which has raised interest in enterprise resource planning (ERP) software, which keeps track of transportation, manufacturing, and human resources.

The ERP industry is dominated by SAP, according to Cowen Enterprise and So projections, with a 23% worldwide share, compared to 10% for Oracle, 4% for Microsoft, and 3% for Workday.

Companies are genuinely restructuring their supply chains to reduce risk associated with the situation in China and to reduce their reliance on China. In September 2021, shipping rates from Asia to the West Coast of the United States reached record highs and are still nearly three times higher now than they were in September 2019.

Now, a lot of businesses are considering how they might alleviate this expense burden. According to Klein, 50–60% of your company operations are impacted by ERP. “So much new technology supports process automation, and so much technology supports intelligence and predictive analytics, which supports supply chain connectivity. You can no longer afford to use an ERP that is 10 years old.

By abandoning near-term profit expectations and announcing intentions to concentrate on cloud computing in October 2020, SAP set a new goal of $22 billion in cloud sales by 2025.

While SAP’s cloud and software revenue increased 34% to nearly $3 billion in the most recent quarter, above analyst expectations, the company’s overall profitability were mixed. Since it disclosed a reduced profit expectation for fiscal year 2022 on July 21 — from €7.6 billion to €7.9 billion ($7.4 billion to $7.7 billion) compared to earlier guidance of €7.8 billion to €8.25 billion — shares have dropped by 12 percent. A combination of activities ending in Russia as a result of the conflict in Ukraine and the switch from on-premise software licencing to cloud subscriptions contributed to the decrease.

Wedbush senior technology analyst Dan Ives stated, “They are in a huge position of power to move their on-premise ERP business to the cloud.” But he said that if SAP has problems with execution or product launch, Oracle and Microsoft may gain market share during the changeover. “This industry is highly competitive. However, SAP is in charge of their own future and is on the road to success in the ERP cloud.

Klein stated, “I feel the present climate is really speeding the transition to the cloud. A number of organisations claim we notice an increase in the amount of cybersecurity threats. With all of these demands to safeguard our system and our data, we are completely overwhelmed. They want to transfer to the cloud and pass it over to a large technological business.

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